A system designed to help small 401(k) balances follow workers to their next job is running into a snag: Roth accounts.
The Portability Services Network, a coalition of large 401(k) administrators — including Fidelity Investments, Vanguard Group and Alight Solutions, among others — in conjunction with Retirement Clearing House, has been in operation since late 2023. Its purpose is to address the problem of small-balance 401(k)s being left behind when employees leave their company — which can result in workers losing track of their retirement savings or cashing out.
Typically, when you part ways with an employer, you can leave your money in their 401(k) plan if the account value is above $7,000. Balances under $1,000 that you leave behind usually result in the plan cashing you out and mailing you a check, which may be taxable and subject to a 10% penalty if you’re under age 59½.
For amounts between $1,000 and $7,000, most plans roll over the balance to an individual retirement account if the ex-employee takes no action to move it on their own. If the money is in a traditional 401(k) — funded with pre-tax contributions and taxed when withdrawn in retirement — it goes into a traditional IRA. Likewise, Roth 401(k)s, funded with after-tax contributions and withdrawn tax-free down the road, go into Roth IRAs.
